BUY/WRITE STRATEGY (Updated Jan. 1, 2012)

BUY/WRITE STRATEGY Featuring Pharmboy

Updated Jan. 1, 2012.  Happy New Year!

We have three timely buy/write ideas from Pharmboy to illustrate how the "buy/write" works. Key is that for 100 shares of stock, Pharmboy sells 1 call and 1 put against the 100 share position. This is a bullish position, but hedged by

(1) the sold call. The price of the sold call increases if the stock rises, but decreases if the stock falls. Thus, being short the call limits a gain on the stock while offsetting a loss in the stock, and

(2) selling the premium in both the SOLD call and put. If the stock price rises, the value of the sold call goes up but the value of the sold put goes down (making it cheaper to buy the put back, but more expensive to buy the call back). Because the call and put are SOLD, not bought, as the time on the options run out, the premium runs down as well.

These trade ideas were posted in this week's Stock World Weekly, "Sound and Fury". This is an excerpt. To learn more about this strategy, and for more examples, keep reading below.

Excerpt:

We are also reiterating a few trade ideas Pharmboy mentioned in our recent review of his ideas in Stock World Weekly, December 18, No Virginia, There is No Santa Claus Rally. In that issue, Pharmboy wrote, “Regarding Protalix BioTherapeutics, (PLX, $5.23), I am hopeful that PLX will get approval for taliglucerase alfa in May or June of 2012. In our virtual portfolio, we have 200 shares of PLX (average cost of $5.26). I’d add a buy-write to the PLX shares. The trade idea in a “buy/write” is to SELL one call and SELL one put per each 100 shares of stock owned. For 200 shares of PLX, I like selling two May 2012 $7.50 calls and selling two May 2012 $7.50 puts for $3.70 or better combined. This strategy gives us a chance to let PLX rise over time and buy back the put before the FDA date. I like the same idea for a new position in PLX.” 

PLX opened on Dec. 19 at $5.19 and closed Dec. 30 at $4.93. The May 2012 $7.50 calls are trading at $0.55 and the May 2012 $7.50 puts are trading at $3.10 - these can still be sold for $3.65 combined. Shares of PLX are now cheaper. 

Pharmboy also discussed several other trade ideas for his virtual portfolio. He still likes the two outlined below. (The third, a long trade idea based on CRIS, is out his initial range. CRIS is 13% higher - it opened Dec. 19 at $4.13 and closed Dec. 30 at $4.68.)

Pharmboy: “PDLI ($6.01) – I like selling one May 2012 $6 call and put for $0.95 or better for 100 shares of PDLI.” PDLI opened at $6.01 on Dec. 19 and closed at $6.20 on Dec. 30. The May 2012 $6 call is trading at $0.50 and the May 2012 put is trading at $0.40 - these can still be sold for a combined $0.90. 

“MITI ($6.88) - I like selling one May 2012 $7.5 call and put for $1.90 or better for 100 shares of MITI.” MITI opened at $6.92 on Dec. 19 and closed at $7.19 on Dec. 30. The May 2012 $7.50 call is trading at $0.70 and the May 2012 $7.5 put is trading at $1.10 - these can still be sold for a combined $1.80.

NEW (an afterthought):  I also like buying 100 shares of VRTX ($33.21) combined with selling a Jan. 2013 $35 call and selling a Jan. 2013 $30 put for $12 or so. 

******

Updated Jan. 1, 2012.  Happy New Year!

We have three timely buy/write ideas from Pharmboy to illustrate how the "buy/write" works. Key is that for 100 shares of stock, Pharmboy sells 1 call and 1 put against the 100 share position. This is a bullish position, but hedged by

(1) the sold call. The price of the sold call increases if the stock rises, but decreases if the stock falls. Thus, being short the call limits a gain on the stock while offsetting a loss in the stock, and

(2) selling the premium in both the SOLD call and put. If the stock price rises, the value of the sold call goes up but the value of the sold put goes down (making it cheaper to buy the put back, but more expensive to buy the call back). Because the call and put are SOLD, not bought, as the time on the options run out, the premium runs down as well.

These trade ideas were posted in this week's Stock World Weekly, "Sound and Fury". This is an excerpt. To learn more about this strategy, and for more examples, keep reading below.

Excerpt:

We are also reiterating a few trade ideas Pharmboy mentioned in our recent review of his ideas in Stock World Weekly, December 18, No Virginia, There is No Santa Claus Rally. In that issue, Pharmboy wrote, “Regarding Protalix BioTherapeutics, (PLX, $5.23), I am hopeful that PLX will get approval for taliglucerase alfa in May or June of 2012. In our virtual portfolio, we have 200 shares of PLX (average cost of $5.26). I’d add a buy-write to the PLX shares. The trade idea in a “buy/write” is to SELL one call and SELL one put per each 100 shares of stock owned. For 200 shares of PLX, I like selling two May 2012 $7.50 calls and selling two May 2012 $7.50 puts for $3.70 or better combined. This strategy gives us a chance to let PLX rise over time and buy back the put before the FDA date. I like the same idea for a new position in PLX.” 

PLX opened on Dec. 19 at $5.19 and closed Dec. 30 at $4.93. The May 2012 $7.50 calls are trading at $0.55 and the May 2012 $7.50 puts are trading at $3.10 - these can still be sold for $3.65 combined. Shares of PLX are now cheaper. 

Pharmboy also discussed several other trade ideas for his virtual portfolio. He still likes the two outlined below. (The third, a long trade idea based on CRIS, is out his initial range. CRIS is 13% higher - it opened Dec. 19 at $4.13 and closed Dec. 30 at $4.68.)

Pharmboy: “PDLI ($6.01) – I like selling one May 2012 $6 call and put for $0.95 or better for 100 shares of PDLI.” PDLI opened at $6.01 on Dec. 19 and closed at $6.20 on Dec. 30. The May 2012 $6 call is trading at $0.50 and the May 2012 put is trading at $0.40 - these can still be sold for a combined $0.90. 

“MITI ($6.88) - I like selling one May 2012 $7.5 call and put for $1.90 or better for 100 shares of MITI.” MITI opened at $6.92 on Dec. 19 and closed at $7.19 on Dec. 30. The May 2012 $7.50 call is trading at $0.70 and the May 2012 $7.5 put is trading at $1.10 - these can still be sold for a combined $1.80.

NEW (an afterthought):  I also like buying 100 shares of VRTX ($33.21) combined with selling a Jan. 2013 $35 call and selling a Jan. 2013 $30 put for $12 or so. 

 

Comments

[Trading on line]

Thanks! But there's just one thing I didn't understand PLX sell, how come this can still be sold $3.65 combined? I'm pretty sure I read it's not possible anymore.. Correct me if I'm wrong.

[ilene]

That post was from a while ago, and the premiums are probably a lot less now.